Monthly Archives: June 2020

gk The Outlook for Economic Policy. By David Laws, Adviser to GK_

The Outlook for Economic Policy. By David Laws, Adviser to GK.

For a politician who has presided over a likely quadrupling of Britain’s budget deficit in a period of just over 3 months, Chancellor Rishi Sunak looks a remarkably relaxed man. Like most Finance Ministers, he realises that the actions he has taken – spending more, taxing less, nationalising large parts of the UK’s private sector employment, and letting public borrowing skyrocket – have been far less politically and economically risky than doing nothing, in the face of an economic calamity.

You have to look back hundreds of years, to before reliable economic data was collected, to find a period where the UK economy has contracted so much and so swiftly. The Chancellor has another reason for being more relaxed than might be expected – record low interest rates mean that the government faces a zero or even negative cost of borrowing. That has removed the concerns about debt “sustainability” that usually arise when borrowing takes off – on this occasion, there is no immediate prospect of the UK or any other major economy facing spiralling debt service payments of the type that have hit countries such as Argentina, Greece or Italy in the past.

It would be wrong to suggest that economic policy choices to date have been “easy”, but in a sense they have been almost inevitable – as was the near nationalisation of most of the banking system back in 2007/2008, when the alternative was the complete collapse of the financial system.  From now on, some of the choices facing the Chancellor and the Prime Minister will become more difficult – not least as large parts of the “life support” offered to the economy since March are steadily withdrawn. Particularly notable, of course, is the phasing out of the “furlough” scheme over the next four months – no wonder Boris Johnson is keen to get the economy and society open again.

So, what should we expect on economic policy over the next few months? It is worth us focusing on growth, public spending, and deficit management. 

Firstly, growth. It’s clear that the government’s main focus now has to be on re-opening the economy (as far as the virus will allow) and preventing a large increase in unemployment and business failures, as the furlough scheme is withdrawn.

A set of new economic measures can be expected to be announced before the end of July – but the scale of any package remains unclear. Measures to boost infrastructure spending, ease planning restrictions, and help establish more science-based businesses outside London and the South-East would all be in line with previous government policies. There could also be additional help for small businesses and possibly an extension of the scheme to delay business VAT payments. The former Chancellor, Sajid Javid has advocated potentially more expensive moves to deliver a short term boost to the economy – including a cut in VAT and/or a cut to employer national insurance contributions. Both measures would be expensive, and it’s not clear that a cut in employer national insurance contributions would have a large employment impact. Whether the Chancellor is willing to further boost borrowing to pay for such tax cuts will depend partly on a political calculation and partly on the speed with which the economy appears to be recovering from its COVID-induced slumber.

Secondly, public spending. It’s clear that the government does not wish to risk a return to full blown austerity. The “easier” savings in public spending were made long ago, and in the short-term the economy could not bear additional deflationary measures. Instead, as well as extra infrastructure spending, the government is likely to want to spend money to protect health services and to avoid a big rise in youth unemployment. Extra support for technical and vocational training, and for apprenticeships, would have a strong policy rationale (following on from the government’s extra £1bn for schools). Meanwhile, difficult decisions will need to be made over public sector pay. If inflation remains highly subdued, the government could make a good case for a pay freeze next year, but this will be politically sensitive – not least for workers in the NHS and care homes.

Finally, the budget deficit. The Chancellor won’t worry too much about the short-term rise in the deficit, and will expect interest rates to remain low. He will treat the COVID shock as a one-off extreme incident, justifying a large rise in the national debt, which may have to be paid off over many decades. But the Treasury cannot afford to be as relaxed if the budget deficit remains high after the economy has recovered. With the prospect of a rapidly ageing population, and the associated rise in pension and health spending, the government would not want borrowing to get stuck at a heightened level. Nor will politicians want to take difficult decisions too close to the next General Election. So over the next 18 months, the Chancellor may need to consider a range of measures to gradually reduce the deficit, by raising tax revenues and controlling key areas of spending.

What type of tough medicine could be on the agenda? Well, the “triple lock” on the state pension (a Liberal Democrat policy which I recall negotiating with the Conservatives in 2010) might be watered down. Employee national insurance contributions might be extended to pensioners who are still in work. The Chancellor has already put down a marker about reviewing the tax status of the self-employed (a “courageous” policy for a Conservative Chancellor if there ever was one). Other possibilities include higher taxes on those who have come through the pandemic largely unscathed, including (broadly) those on higher incomes. We are likely to continue to see speculation about the future of pension tax reliefs, and more pressure for additional “green taxes”.

In short, while the Chancellor cannot afford to rush into a second round of austerity, nor can he and the Treasury forever ignore the medium and long term impacts of COVID. Our current enforced lockdown will be paid for by future generations, but within a year or so the present generation will likely also be asked to make its contribution.

Assessing bolt-on risks and opportunities in a time of huge political and economic uncertainty

Assessing bolt-on risks and opportunities in a time of huge political and economic uncertainty

It’s an uncomfortable truth, but the impact of COVID means that many companies now seem attractive and viable investment opportunities.

Many of the investors we speak to expect to see more appealing valuations and more assets becoming available, as owner managers and parent companies work to de-risk, improve their balance sheets, or keep their businesses going. Bolt-on opportunities over the next 3-6 months seem particularly appealing, while the main market recovers.

But this will be against a backdrop of considerable political uncertainty – in terms of how the lockdown will be eased and what measures governments will take to boost their economics and improve their fiscal situation.

This period will be even more uncertain than the terrain GK navigated for clients after the global financial crisis. The investors that got a measure of these risks early on were able to able to benefit from investment opportunities that others avoided.

 Policy changes are likely be extensive as we emerge from lockdown and over the longer term. New taxes and reduced public funding in many areas (as resources get reallocated to heath & social care) could harm the prospects for many businesses.

And it is still uncertain how and when many sections of the economy will get back to something resembling pre-COVID trading levels, given that it could be a long time before UK social distancing measures are significantly reduced (to the 1-1.5m levels that most countries use) for offices, bars and restaurants and leisure facilities.

Some policy changes could affect some sectors or business models more than others. For many FS or subscription-based businesses, for example, COVID-driven payment holidays might be extended. And gig economy based businesses could face new regulations in the light of widespread dissatisfaction with how companies and governments have treated gig economy workers.

So how can investors assess these risks and opportunities for potential bolt-ons? We have already written in detail about how businesses and investors can prepare to emerge from lockdown, but assessing the political risks and opportunities relating to bolt-on deals presents different challenges.

The bolt-ons that many investors find attractive are in niche, specialist areas, so they are more exposed to changes in regulation or taxation or public procurement than bigger businesses that can flex around more diverse offers.

This makes it all the more important to focus on the material risks and opportunities, clearly articulating what specific political risks could mean for each individual business.

We recommend that investors or companies assessing bolt-on opportunities undertake political due diligence focused on identifying any red flags and the scope to mitigate them. More comprehensive risk and opportunity assessments can be undertaken post-deal.

The same applies to ESG: time and other resource factors might limit the scope for comprehensive ESG DD, but this is no excuse for neglecting ESG – especially at a time when public and private buyers have heightened COVID-related concerns about key ESG issues like workplace and product health & safety and companies’ treatment of their workforces and vulnerable consumers.

We expect a lot more bolt-on activity in 2020 and can help investors and companies identify and mitigate the key risks early on.

For more information, please contact